United FT understands that the successful issuance of letters of credit is a vital part of the CVRDNs' widespread and effective adoption in the marketplace. The active involvement of a selection of pre-qualified, sophisticated banks, commercial lenders and investors that are willing to credit enhance pre-qualified commercial projects and asset portfolios is what brings the CVRDN to life. With this in mind, United FT has developed certain associated products, such as the Enhancement CPC, that can actively support the credit enhancement process related to the CVRDN and increase the field of potential entities that are able to participate and financially benefit from playing a role.
In order for the CVRDN to function properly, the CVRDN Issuer requires a Principal Letter of Credit to be issued by a bank or other acceptable financial institution as a form of credit enhancement in order to access the CVRDN proceeds held by the transaction Trustee. This means that a CVRDN Issuer will need to make a solid case for the credit-worthiness of whatever commercial assets it intends to acquire with the CVRDN proceeds. Only upon providing a complete credit package, such that a bank, lender or investor will step in to cause the issuance of a letter of credit, will the CVRDN Issuer be able to access the note proceeds it has raised.
Once a letter of credit package has been approved, a letter of credit issuance fee will be agreed for payment (either quarterly or annually) to the entity providing the credit. The letter of credit fees should be calculated in to the annual all-in borrowing costs associated with the CVRDN proceeds.
The below diagram profiles the operation of the letter of credit in CVRDN processes.
Benefits and Advantages
There are certain inherent benefits and advantages to a bank, lender or investor providing the credit enhancement for a CVRDN through the issuance of a Principal Letter of Credit. Specifically, the entity credit enhancing the CVRDN:
Enjoys exposure to an understandable transaction with a clear collateral structure;
Is in a senior secured position as to the underlying assets being acquired;
Enters a transaction without lending its own cash, but rather by sharing its credit;
May be able to increase its credit capacity and enhance its financial performance when issuing a letter of credit; and
Receives an annual annuity of pure fee-based income instead of earning traditional interest spread income.
We encourage you to read more about CVRDNs in our Commercial Applications section of our website.